Sunday, February 12, 2012

In an attempt to increase overseas capital inflows and reduce the current account deficit due to higher imports, India has liberalised foreign investment in stock markets. Qualified foreign investors (QFIs) can now invest directly in Indian equities. Lets have an overview of such new feature introduction.

A QFI is an individual, an association or a group from a foreign country complaint with standards mandated by the Financial Action Task Force, an inter-government body that formulates policies to combat money laundering and terrorist financing. Foreign Institutional investors (FIIs) and foreign venture capital investments do not come under the QFI category.

An individual QFI can invest up to 5% of the paid-up capital of a listed company. Total investment by QFIs in a listed company cannot exceed 10% of its paid paid-up capital. Foreign investors will also be allowed to acquire equity shares by way of rights issue, bonus shares or equity shares on account of stock split, amalgamation, demerger or such corporate actions.

QFIs can invest only in listed Indian equities through depository participants (agents of depositories that provide accounts for holding securities in electronic format) registered with SEBI. Each investor will be allowed to open one trading account and one demat account with a depository participant but will not be allowed to open a dedicated bank account in India.

Depository participants will purchase equity at the instruction of QFIs within five working days. If a depository participant fails to execute the order within five working days, the funds would be repatriated back to the QFIs designated overseas bank. When QFIs sell their stock holding, the sale proceeds will also be repatriated to their designated banks within five working days. In addition, the depository participants wil ensure compliance with the "Know Your Customer" norms for QFIs. QFIs have already been allowed to invest in mutual funds.

The new scheme is expected to help increase the depth of the Indian market and in combating volatility beside increasing foreign inflows in the country.